<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NO. 0-26682
------------------------
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
<TABLE>
<S> <C>
DELAWARE 11-3199437
(State or other Jurisdiction of Incorporation (IRS Employer Identification
or Organization) No.)
</TABLE>
10 EDISON STREET EAST, AMITYVILLE, NEW YORK 11701
(Address of Principal Executive Offices)
(516) 842-7600
(Issuer's Telephone Number, Including Area Code)
------------------------------
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No ____
The number of outstanding shares of the Registrant's only class of common
stock as of June 30, 1997: 11,956,968
Transitional Small Business Disclosure Format (check one):
Yes ____ No _X_
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
JUNE 30, 1997
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1.--Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1997 and December 31, 1996................................ 1
Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and June 30, 1996.... 2
Consolidated Statements of Operations for the Three Months Ended June 30, 1997 and June 30,
1996............................................................................................ 3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and June 30, 1996.... 4
Notes to Consolidated Financial Statements........................................................ 5
Item 2.--Management's Discussion and Analysis..................................................... 6
PART II--OTHER INFORMATION................................................................................... 9
SIGNATURE.................................................................................................... 10
</TABLE>
i
<PAGE>
PART I
ITEM 1.--FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
AT AT
JUNE 30, DECEMBER 31,
1997 1996
------------- ---------------
<S> <C> <C>
(UNAUDITED) (NOTE)
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 419,686 $ 233,566
Receivables.................................................................... 4,639,178 3,529,997
Inventories.................................................................... 4,530,665 4,025,586
Prepaid expenses and other current assets...................................... 146,714 97,617
------------- ---------------
Total current assets....................................................... 9,736,243 7,886,766
Fixed assets, net................................................................ 1,277,667 1,401,062
Intangible assets, net........................................................... 5,882,330 6,205,754
Other assets..................................................................... 245,019 328,670
Notes receivable from related parties............................................ 276,929 281,011
------------- ---------------
Total assets............................................................... $ 17,418,188 $ 16,103,263
------------- ---------------
------------- ---------------
LIABILITIES
Current liabilities:
Accounts payable............................................................... $ 3,209,733 $ 2,907,558
Accrued expenses............................................................... 777,809 939,636
Current portion of long-term debt.............................................. 198,286 19,078
------------- ---------------
Total current liabilities.................................................. 4,185,828 3,866,272
Long-term debt................................................................... 7,049,926 6,840,529
Deferred rent payable............................................................ 28,187 22,007
------------- ---------------
11,263,941 10,728,808
STOCKHOLDERS' EQUITY
Common stock, issued 11,993,406 shares........................................... 119,934 119,934
Paid-in capital.................................................................. 9,409,706 9,409,706
Accumulated deficit.............................................................. (3,088,604) (3,827,890)
Unearned compensation arising from stock awards.................................. (276,789) (317,295)
Treasury stock at cost (36,438 shares of common stock)........................... (10,000) (10,000)
------------- ---------------
Total stockholders' equity................................................. 6,154,247 5,374,455
------------- ---------------
Total liabilities and stockholders' equity................................. $ 17,418,188 $ 16,103,263
------------- ---------------
------------- ---------------
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for audited financial statements.
See Accompanying Notes.
1
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN U.S. DOLLARS) (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net Sales.......................................................................... $ 13,824,704 $ 10,890,235
Cost of Sales...................................................................... 8,324,336 6,581,652
------------- -------------
Gross Profit................................................................... 5,500,368 4,308,583
------------- -------------
Operating expenses:
Selling.......................................................................... 1,716,788 1,456,718
General and administrative....................................................... 1,272,783 1,364,480
Research and development......................................................... 960,270 780,958
Amortization expense............................................................. 445,605 357,074
------------- -------------
Total operating expenses....................................................... 4,395,446 3,959,230
------------- -------------
Income from operations............................................................. 1,104,922 349,353
Interest expense, net.............................................................. 358,886 278,706
------------- -------------
Income before provision for income taxes........................................... 746,036 70,647
Provision for income taxes......................................................... 6,750 1,355
------------- -------------
Net income......................................................................... $ 739,286 $ 69,292
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Net income per share............................................................... $ .06 $ .01
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Weighted average shares outstanding................................................ 12,548,354 11,756,968
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</TABLE>
See Accompanying Notes.
2
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN U.S. DOLLARS) (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
Net Sales.................................................................... $ 7,044,867 $ 5,627,816
Cost of Sales................................................................ 4,193,979 3,303,591
------------- -------------
Gross Profit........................................................... 2,850,888 2,324,225
------------- -------------
Operating expenses:
Selling.................................................................... 881,914 748,475
General and administrative................................................. 654,234 679,975
Research and development................................................... 486,764 382,086
Amortization expense....................................................... 223,619 181,037
------------- -------------
Total operating expenses............................................... 2,246,531 1,991,573
------------- -------------
Income from operations....................................................... 604,357 332,652
Interest expense, net........................................................ 187,844 149,014
------------- -------------
Income before provision for income taxes..................................... 416,513 183,638
Provision (credit) for income taxes.......................................... 5,400 (1,280)
------------- -------------
Net income................................................................... $ 411,113 $ 184,918
------------- -------------
------------- -------------
Net income per share......................................................... $ .03 $ .02
------------- -------------
------------- -------------
Weighted average shares outstanding.......................................... 12,579,966 11,756,968
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</TABLE>
See Accompanying Notes.
3
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS) (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
Cash flows from operating activities:
Net income.................................................................. $ 739,286 $ 69,292
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization............................................. 610,567 562,004
Deferred rent............................................................. 6,180 4,764
Changes in assets and liabilities:
Accounts receivable..................................................... (1,109,181) (1,868,062)
Inventories............................................................. (505,079) (167,197)
Prepaid expenses and other current assets............................... (49,097) (128,535)
Other assets............................................................ 1,976 (83,593)
Accounts payable........................................................ 302,175 875,142
Accrued expenses........................................................ (161,827) 219,638
------------- -------------
Net cash used in operating activities..................................... (165,000) (516,547)
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets.................................................... (41,567) (59,993)
Notes receivable............................................................ 4,082 49,742
Decrease in cash surrender value of life insurance policy................... -- 288,153
Acquisition of Seafla, Inc.................................................. -- (54,595)
------------- -------------
Net cash (used in) provided by investing activities....................... (37,485) 223,307
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt................................................ 800,000 150,000
Repayment of long-term debt................................................. (411,395) (52,000)
------------- -------------
Net cash provided by financing activities................................. 388,605 98,000
------------- -------------
Increase (decrease) in cash................................................... 186,120 (195,240)
Cash-beginning of period...................................................... 233,566 467,134
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Cash-end of period............................................................ $ 419,686 $ 271,894
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</TABLE>
See Accompanying Notes.
4
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
Technology Flavors & Fragrances, Inc. (the "Company") develops and
manufactures flavors, fragrances and seasonings used to provide or enhance
flavors or fragrances in a wide variety of consumer and industrial products.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 1997 and for the three month
period ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB/A for the year ended December 31, 1996.
2. INVENTORIES
Components of inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Raw Materials................................................................... $ 3,482,493 $ 3,145,743
Finished Goods.................................................................. 1,048,172 879,843
------------- -----------------
$ 4,530,665 $ 4,025,586
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------------- -----------------
</TABLE>
3. EARNINGS PER SHARE
Net income per share is based on the weighted average number of common
shares after giving effect to dilutive stock options and warrants. Fully diluted
earnings per share has not been presented as the dilutive effect is not
material.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following information for the three month and six month periods ended
June 30, 1997 and 1996 has been derived from the Company's unaudited
consolidated financial statements and should be read in conjunction with the
Company's annual report on Form 10-KSB/A for the year ended December 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ------------------------------------------
1997 1996 1997 1996
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales.......................... $ 7,045 100.0% $ 5,628 100.0% $ 13,825 100.0% $ 10,890 100.0%
Gross profit....................... 2,851 40.5 2,324 41.3 5,500 39.8 4,309 39.6
Operating expenses:
Selling.......................... 882 12.5 748 13.3 1,717 12.4 1,457 13.4
General and administrative....... 654 9.3 680 12.1 1,273 9.2 1,365 12.5
Research and development......... 487 6.9 382 6.8 960 6.9 781 7.2
Amortization expense............. 224 3.2 181 3.2 445 3.2 357 3.3
Income from operations............. 604 8.6 333 5.9 1,105 8.0 349 3.2
Interest expense, net.............. 188 2.7 149 2.6 359 2.6 279 2.6
Provision (credit) for income
taxes............................ 5 -- (1) -- 7 -- 1 --
Net income......................... 411 5.8 185 3.3 739 5.3 69 .6
</TABLE>
NET SALES. Net sales increased 25% to $7,045,000 for the three months ended
June 30, 1997 from $5,628,000 for the same period in 1996 and increased 27% to
$13,825,000 for the six months ended June 30, 1997 from $10,890,000 for the
comparable six months of 1996. These increases were primarily due to shipments
of new flavor products to a significant customer and the benefits derived from
the integration of the sales and marketing activities of the Company's Seafla
Division acquired in December 1995.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 40.5%
for the three months ended June 30, 1997 from 41.3% during last year's
comparable quarter, due principally to a change in product mix. The gross profit
percentage of 39.8% for the six month period ended June 30, 1997 was comparable
to the gross profit percentage of 39.6% reported during last year's six month
period.
SELLING EXPENSES. Selling expenses increased to $882,000 for the three
months ended June 30, 1997 from $748,000 for the comparable 1996 period and
increased to $1,717,000 for the six months ended June 30, 1997 from $1,457,000
for the comparable 1996 period. These increases were due principally to the
hiring of additional sales personnel and expanded sales support and increased
sales commissions on higher volume sales. Selling expenses, as a percentage of
sales, decreased to 12.5% for the three months ended June 30, 1997 from 13.3%
for last year's comparable quarter and decreased to 12.4% for the six months
ended June 30, 1997 from 13.4% for last year's comparable six month period as a
result of increased sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to $654,000 for the three months ended June 30, 1997 from $680,000 for
the same quarter in 1996 and decreased to $1,273,000 for the six months ended
June 30, 1997 from $1,365,000 for the six month period in 1996. These decreases
were primarily as a result of the cost reduction program implemented during the
latter part of the fourth quarter of 1996. General and administrative expenses,
as a percentage of sales, decreased to 9.3% for the three months ended June 30,
1997 from 12.1% for last year's comparable quarter and decreased to 9.2% for the
six months ended June 30, 1997 from 12.5% for the six months ended June 30, 1996
as a result of cost reductions and increased sales volume.
6
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $487,000 for the three months ended June 30, 1997 from $382,000 for
the three months ended June 30, 1996 and increased to $960,000 for the six
months ended June 30, 1997 from $781,000 for the six month period in 1996 due to
expanded research and development projects and the hiring of additional
technical personnel.
AMORTIZATION EXPENSE. Amortization expense increased to $224,000 for the
three months ended June 30, 1997 as compared to $181,000 for the second quarter
of 1996 and increased to $445,000 for the six months ended June 30, 1997 from
$357,000 for the comparable six month period in 1996. The increases were due
principally to the amortization of deferred charges associated with the
Company's $1.5 million convertible debt financing consummated in October 1996.
INTEREST EXPENSE, NET. Interest expense increased to $188,000 for the three
months ended June 30, 1997 from $149,000 for the comparable 1996 period and
increased to $359,000 for the six months ended June 30, 1997 from $279,000 for
the six months ended June 30, 1996. These increases were primarily due to the
additional long-term debt incurred by the Company in October 1996 in connection
with the $1.5 million convertible debt financing. See "Liquidity and Capital
Resources."
PROVISION FOR INCOME TAXES. Provision for income taxes represents state
franchise taxes. No federal income tax provision for the six months ended June
30, 1997 was provided due to the Company's availability of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from net income and non-cash charges, principally
depreciation and amortization, totalling $1,350,000 was utilized to support the
growth in receivables of $1,109,000 and inventories of $505,000. Working capital
at June 30, 1997 was $5,550,000 as compared to $4,020,000 at December 31, 1996.
The increase in working capital of $1,530,000 was principally attributable to
the growth in accounts receivables and inventories. During the second quarter of
1997, the Company paid down its revolving credit facility principally through
excess cash flow.
Historically, the Company's financing needs have been met through the
issuances of equity and debt securities. For several years prior to 1996, the
Company's principal line of credit for working capital requirements was a $2.0
million short-term revolving note, which the Company extended upon maturity.
Borrowings under the revolving line of credit bore interest at the rate of
one-half percent above the prime rate.
In October 1996, the Company consolidated a $3,500,000 term loan (obtained
in connection with the December 1995 acquisition of the assets of Seafla, Inc.
(currently the Seafla Division)) and its $2,000,000 revolving credit into a
$5,500,000 revolving credit facility (the "Credit Facility"). Borrowings under
this Credit Facility bear interest at 1 1/4% above the lender's prime rate and
mature on January 15, 1999. At June 30, 1997, the borrowings under the Credit
Facility accrued interest at the rate of 9 3/4% per annum. The borrowings are
secured by liens on substantially all of the assets of the Company. At June 30 ,
1997, the Company had outstanding borrowings under the Credit Facility of
$4,925,000 and $450,000 available for borrowing against its borrowing base. In
April 1997, the Company and the lender under the Credit Facility entered into a
waiver and modification agreement (the "Waiver") which waived compliance by the
Company with certain covenants for 1996 and amended one of such covenants for
1997. Additional events of default were also added to the Credit Facility. In
connection with the Waiver, the Company issued the lender a warrant to purchase
100,000 shares of Common Stock with an exercise price of $2.40 per share.
In October 1996, the Company also consummated a financing which provided for
the issuance of $1,500,000 principal amount of 9% Convertible Subordinated Notes
due October 17, 1998 (the "Convertible Notes") and the issuance of Class A
Warrants to purchase an aggregate of 450,000 shares of Common Stock at $2.40 per
share and Class B Warrants to purchase an aggregate of 156,250 shares of Common
7
<PAGE>
Stock at $2.70 per share. The Convertible Notes are secured by liens on
substantially all of the assets of the Company, which liens are junior to those
in favor of the Company's lender under the Credit Facility.
The Convertible Notes are convertible into shares of Common Stock at the
option of the Company at any time on or prior to October 16, 1997 at a
conversion price equal to the average market price of the Common Stock for the
ten trading days immediately preceding the conversion date (the "average market
price"). From October 17, 1997 to maturity on October 16, 1998, the Convertible
Notes are convertible into shares of Common Stock at the option of the holders
at a conversion price equal to the greater of the average market price or $1.50
per share (subject to adjustments under certain circumstances).
Pursuant to the Waiver, the Company is required to exercise its option to
convert the Convertible Notes into Common Stock in accordance with the terms of
the financing agreement related to the Convertible Notes prior to October 17,
1997. The exact number of shares of Common Stock issuable upon conversion of all
of the Convertible Notes cannot currently be determined but, generally, such
issuances of Common Stock will vary inversely with the market price of the
Common Stock. On July 17, 1997, the closing bid price of the Common Stock on the
Nasdaq OTC Bulletin Board was US $1.78 per share. If the closing bid price of
the Common Stock on July 17, 1997 were used to determine the number of shares of
Common Stock issuable upon conversion of the Convertible Notes, the Company
would be obligated to issue a total of approximately 843,000 shares of Common
Stock, assuming all such notes were converted at such time. To the extent the
"average market price" per share of the Common Stock is lower or higher than
$1.78 per share, the Company would issue more or less shares of Common Stock
than reflected in such estimate and such difference could be material.
8
<PAGE>
PART II--OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
</TABLE>
On June 25, 1997, the Company held an annual meeting of shareholders (the
"Annual Meeting"). The proposals voted upon at the Annual Meeting and the
results with respect to each proposal are set forth below:
PROPOSALS VOTED UPON AT ANNUAL MEETING
1. To elect six directors to serve for a term of one year and until their
respective successors are duly elected and qualified.
2. To ratify the selection by the Company's Board of Directors of Ernst &
Young L.L.P. as independent auditors of the Company for the fiscal year ending
December 31, 1997 and to authorize the Board of Directors to fix their
remuneration.
<TABLE>
<CAPTION>
ABSTAIN/NOT
PROPOSALS FOR AGAINST VOTING
- ------------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
No. 1 (Election of Directors)
Philip Rosner................................................................ 8,318,927 5,000 3,744
A. Gary Frumberg............................................................. 8,318,927 5,000 3,744
Richard R. Higgins........................................................... 8,318,927 5,000 3,744
Sydney Stein................................................................. 8,318,927 5,000 3,744
Duncan Shirreff.............................................................. 8,318,927 5,000 3,744
Scott Cunningham............................................................. 8,318,927 5,000 3,744
No. 2.......................................................................... 8,322,927 1,000 3,744
</TABLE>
<TABLE>
<S> <C>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27 (Appendix A to Item 601(c) of Regulation S-B)
b) Reports on Form 8-K
None
</TABLE>
9
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July 29, 1997
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By /s/ JOSEPH A. GEMMO
-----------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
(Principal Financial Officer and Officer
Duly
Authorized to Sign on Behalf of
Registrant)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 419,686
<SECURITIES> 0
<RECEIVABLES> 4,789,178
<ALLOWANCES> (150,000)
<INVENTORY> 4,530,665
<CURRENT-ASSETS> 9,736,243
<PP&E> 2,904,684
<DEPRECIATION> (1,627,017)
<TOTAL-ASSETS> 17,418,188
<CURRENT-LIABILITIES> 4,185,828
<BONDS> 7,163,019
0
0
<COMMON> 119,934
<OTHER-SE> 6,034,313
<TOTAL-LIABILITY-AND-EQUITY> 17,418,188
<SALES> 13,824,704
<TOTAL-REVENUES> 13,824,704
<CGS> 8,324,704
<TOTAL-COSTS> 4,395,446
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 358,886
<INCOME-PRETAX> 746,036
<INCOME-TAX> 6,750
<INCOME-CONTINUING> 739,286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 739,286
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
